We noticed you're browsing in private or incognito mode.

To continue reading this article, please exit incognito mode or log in.

Not a subscriber? Subscribe now for unlimited access to online articles.

How Much Is a User Worth?

Several upstart Internet companies have shown promise in being able to translate user engagement into revenue.

Internet companies are notoriously difficult to value, as investors learned in the dot-com crash 11 years ago. But since the “Web 2.0” companies fueling this year’s Internet IPOs rely upon having a reliable group of engaged users, they do offer at least one telling metric: the amount of money each user is worth. That’s why venture capitalists evaluating such businesses in their early stages often examine how much revenue a company is generating per user.

Bijan Sabet, a venture capitalist at Spark Capital, which has invested in several Internet companies, including Twitter, FourSquare, and Tumblr, says his firm often considers $2 of annual revenue per user to be an important target threshold for startups. By that measure, several of today’s new Web companies show genuine promise, as the chart below indicates.

Footnotes: 1.) The figure for Google users refers to the number of unique monthly search users, which doesn’t reflect all the people that see its ads and use its services. 2.) The figure for Groupon users refers to reported “cumulative customers” in 2010. 3.) The figure for active Zynga users refers to “monthly unique users” from October through December 2010. 4.) The figure for active Twitter users refers to a recent report from Business Insider that found that only 21 million Twitter users follow 32 or more accounts. Twitter considers an “active” user to be someone who is following 30 accounts, with a third of those accounts following back. 5.) Revenue figures for Facebook and Twitter are based on estimates from eMarketer, a research firm. 6.) Revenue figures for Zynga and Groupon come from their IPO filings with the Securities and Exchange Commission.

It’s worth noting that Groupon is an outlier largely because its users buy things from the company rather than serving solely as targets for ads. And of course, revenue per user isn’t an absolute measure of a company’s prospects: after all, Google is the world’s most profitable and valuable Internet company not only because it has a lot of revenue per user, but also because it has a vast number of users. Sheer scale is also a reason for the soaring valuation of Facebook, which now boasts 750 million users. However, by the time public investors get a chance to buy a piece of the company, they’ll have to decide whether its metrics really justify the price, or whether they foreshadow another bursting bubble.

Footnotes: 1.) Public company values are based on closing prices on July 8. 2.) The values for Zynga and Groupon are what each company hopes to attain after its upcoming IPO, according to the Wall Street Journal. 3.) The values for Facebook and Twitter are based on the last round of funding each company has raised, according to the Journal, and recent trades on a private exchange, SharesPost.

Cut off? Read unlimited articles today.

Become an Insider
Already an Insider? Log in.
Want more award-winning journalism? Subscribe to All Access Digital.
  • All Access Digital {! insider.prices.digital !}*

    {! insider.display.menuOptionsLabel !}

    The digital magazine, plus unlimited site access, our online archive, and The Download delivered to your email in-box each weekday.

    See details+

    12-month subscription

    Unlimited access to all our daily online news and feature stories

    Digital magazine (6 bi-monthly issues)

    Access to entire PDF magazine archive dating back to 1899

    The Download: newsletter delivered daily

You've read of three free articles this month. for unlimited online access. You've read of three free articles this month. for unlimited online access. This is your last free article this month. for unlimited online access. You've read all your free articles this month. for unlimited online access. You've read of three free articles this month. for more, or for unlimited online access. for two more free articles, or for unlimited online access.